Apollo Portfolio Company’s Debt Swap Plans Panned

An attempt by Realogy Corp., a portfolio company of Apollo Management LP, to lighten its long-term debt load by swapping out existing bonds for new loans is getting the thumbs-down from the credit ratings agencies, who see the move as a sign of desperation.

Both Moody’s Investors Service and Standard & Poor’s have lowered their corporate credit ratings on the Parsippany, N.J., provider of real estate and relocation services in the wake of its decision to seek to swap up to $500 million in new second-lien incremental term loans for portions of its existing bond issuances. S&P was strident in its comments, saying “we view the exchanges as being tantamount to default given the distressed financial condition of the company.” Moody’s chimed in, stating that it will “classify the exchange as a default upon closing of the transaction.”

On Nov. 13, Realogy announced the swap offer for holders of its 12.375 percent senior subordinated notes due 2015, its 10.50 percent senior notes due 2014, and its 11 percent/11.75 percent senior toggle notes due 2014. The new term loans would mature on April 15, 2014 and Apollo Management, whose holdings include about $69 million of 12.375 percent senior subordinated notes due 2015, plans to participate “to the fullest extent possible” in the offering. It’s estimated that long-term debt, which stood at $6.5 billion as of Sept. 30, could be cut by roughly $600 million, depending on what classes participate and to what level. The expiration date for bond holders to commit to the swap was Nov. 26.

The terms of the swap provide for principal reductions of as much as 64 percent for the swapped notes, again dependent upon class, but annual interest rates get bumped appreciably higher to above-bank-rate (ABR) plus 13 percent or adjusted LIBOR plus 14 percent, at minimum, at Realogy’s discretion. The cap on the rate for the loans related to the senior toggle notes would be set at 19.5 percent.

Apollo Management acquired Realogy in April 2007 in a take-private deal with a total enterprise value of about $8.85 billion. The company operates a number of real estate brokerage franchises, including Coldwell Banker and Century 21, and has suffered accordingly with the downturn in the housing market. For the third quarter ended Sept. 30, revenue fell to $1.34 billion from $1.62 billion in the same period a year earlier. Its net loss for the quarter came in at $50 million, reflecting $152 million in interest expense. Realogy reported its senior secured leverage ratio as of Sept. 30 was 4.8 to 1, just 0.6x below the maximum of 5.35 to 1 required to be in compliance under its credit agreement.

In its filing with the Securities and Exchange Commission related to the loan swap, Realogy struck a suitably dour tone, saying “decreases in homesale sides and home prices will negatively affect the quarterly calculation of our senior secured leverage ratio and there can be no assurance that we will not violate this or other covenants under our senior secured credit facility, or that this will not result in a default under our indentures.”

Moody’s lowered its corporate family rating on the company to ‘Caa2’ from ‘Caa1’ and changed its outlook to negative from stable, among other moves. The agency expects Realogy’s ongoing ability to meet covenant requirements to hinge upon the success of further cost savings and business optimization initiatives. S&P dropped its corporate credit rating to ‘CC’ from ‘CCC’ and cut the ratings on all three bond classes to ‘C’ from ‘CC.’ It also placed all these ratings on CreditWatch with negative implications.

Realogy has already employed the PIK [payment in kind] option for the senior toggle notes due 2014, opting in mid-October to shift the interest and boost the principal amount of the notes by $32 million. In its SEC filing, Realogy noted that the principal amount for these notes will increase on a semi-annual basis for as long as the PIK election remains in effect.